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Answers to Practice Question 8
Multiple Choice Questions
Ch. 11 and 12
Ch. 13
Ch. 14
Ch. 15
1. c
1. c
1. c
1. b
2. d
2. b
2. b
2. b
3. b
3. c
3. c
3. b
4. a
4. c
4. b
4. a
5. b
5. b
5. a
5. b
6. d
6. b
6. c
6. d
7. b
7. c
7. b
7. a
8. a
8. d
8. a
8. d
9. d
9. c
9. d
9. a
10. d
10. b
11. d
11. b
12. b
12. d
13. d
14. c
Answers to Practice Question 8
Problems
Ch. 11 and 12
10.
BANKS
ASSETS
FEDERAL RESERVE SYSTEM
ASSETS
LIAB.
LIAB.
Reserves +$10
U.S. Gov’t
Securities –$10
U.S. Gov’t
Sec. +$10
Bank Reserves
+$10
11. Actual reserves increase by $10 million, required reserves are unchanged, and excess
reserves increase by $10 million.
12. The money supply increases by $100 million.
13.
a. The quantity of money demanded is less than the supply of money by $250 billion.
Thus, there exists excess supply in the money market and excess demand in the bond
market. The interest rate will fall and the price of bonds will rise.
b. 7%
14.
a. 8%
b. The Fed should buy bonds in the amount $100 billion since the money multiplier is 2
(1/RRR = 1/.5 = 2) and the needed level of the money supply is $450 billion (an
increase of $200 billion from the initial money supply of $250 billion).
15.
a. The equilibrium interest rate: 8%. The equilibrium real GDP: $4,500 billion.
b. The equilibrium interest rate: 6%. The equilibrium real GDP: $4,500 billion.
c. The equilibrium real GDP: $6,500 billion. To find this answer, modify the aggregate
expenditure equation as follows:
AE + (- change in the interest rate)(500) = .5Y +
2250 and then solve for Y (remember that Y = AE in equilibrium).
d. The equilibrium interest rate: 7%. To find this answer, you need to modify the
money demand equation : Money demand = 750 – 50r + .025(the change in Y) since
the change in money demand is 25 billion dollars for every 1000 billion dollar increase
in real GDP (or 25/1000 = 0.025 for a $1 change in real GDP). Then equate the
Answers to Practice Question 8
money demand to money supply (money supply = 450) where the change in Y is
$2000B ($6500 B - $4500 B = $2000B).
16.
a. The equilibrium real GDP: $6,500 billion
b. The equilibrium interest rate: 9%. To see this use the equation from 15 (d) for money
demand and see that the change in equilibrium Y is $2000 Billion due to the change in
government spending.
d. The equilibrium real GDP: $5,500 billion. The original increase in the government
expenditure partially crowded out the private spending.
you found in 15 (c).
To see this use the equation
Answers to Practice Question 8
Ch. 13
15.
a. The equilibrium interest rate: 10%.
b. $6,000 billion
c. The money demand curve will shift rightward.
d. 12%. So, higher. AE will decrease.
e. $4,000 billion.
f. Yes.
16.
a. The price of non-labor inputs will increase. This causes unit costs to increase, which
leads firms to raise their prices. Hence, the price level will increase.
b. The AS slopes upward..
17.
a. The equilibrium price level: 100. The equilibrium level of real GDP: $6 billion.
b. The interest rate will increase, which will decrease interest-sensitive consumption and
spending. This results in a decrease in real GDP and a leftward shift in the AD curve.
c. AD = 12 – P/10
d. In the new short run equilibrium, the price level is 80. The real GDP is $4 billion. The
change in the real GDP is $2 billion, which is less than the change in AD, i.e. $4 billion
from part (c).
e. In the new long run equilibrium, the real GDP is $6 billion, which is again the full
employment real GDP. The price level is 60.
f. The long run AS is a vertical line at the full employment level of GDP.